City calls for curbs on foreign listings

Saturday 26 August 2006 19.01 EDT
First published on Saturday 26 August 2006 19.01 EDT

Leading investors are calling for restrictions on the inclusion of foreign companies in British indices following a rush of eastern European, Indian and Chinese listings on the UK stock market and predictions that many more are likely to follow.

Investors are concerned that what are effectively emerging-market companies are exploiting the openness of the UK stock market to increase the liquidity of their shares. Indexed funds, which track the performance of stock market indices, are forced to buy foreign companies if they are included in UK indices, as many are. Many other managed pension and investment funds also follow the index, encouraging demand for these shares.

'What we do not want is companies ... trying to take advantage of the situation that, if they list in the UK, they are automatically registered as local stocks,' said Ali Toutounchi, deputy managing director of indexed funds at Legal & General. 'We have to show that companies cannot gain a bigger client base just by moving to London.'

Companies from emerging markets are often higher-risk than those from developed countries and may not have the same standards of corporate governance. Toutounchi thinks FTSE, which operates the UK's indices, should take account of corporate governance standards, as well as listing and domicile, in deciding companies' eligibility. Thus, he believes, Kazakhstani mining firm Kazakhmys would qualify as it satisfied all UK listing and governance rules, whereas with PartyGaming, which is registered in Gibraltar 'it is not as simple as that'. PartyGaming admits it does not comply with all UK governance rules.

David McCraw, part of the tracker team at Aberdeen Asset Managers, says there should be a 'debate over whether the index should just reflect UK plc'. He points out that Standard & Poor's, which runs the US indices, decided to eject foreign-listed companies, including Unilever and Royal Dutch Shell. McCraw's research indicates that at least 26 eastern European companies, worth up to $30bn, have indicated their intention to float on the London exchange.

These include Russian giants such as Unified Energy Systems, steel group Severstal, and silver producer PolyMetal. Pakistani companies, led by state giant Oil and Gas Development are also said to be eyeing a London listing, reflecting in part the US Sarbanes-Oxley governance and listing rules, which are seen as particularly onerous by overseas companies.

One problem with restricting listing to domestic firms is that many UK companies do most of their business overseas. Jason Hollands of F&C estimates that as much as 80 per cent of the revenues of the FTSE 100 companies is derived overseas.

'We are still some way off the emerging-market companies becoming a huge chunk of the index but over time this may become a bigger issue, especially if commodity prices keep rising,' he said.